Big chains, government target "food deserts"

LOS ANGELES (Reuters) - Independent Philadelphia grocer Jeff Brown says he has cracked the code for making money in some urban communities that in the past have been shunned by big chains as being too risky to invest in.

Part of the secret is catering to the specific tastes of customers in individual stores, something Brown says will be difficult for mammoth retailers like Wal-Mart Stores <WMT.N> and Supervalu <SVU.N> to replicate, now that they are trying to tap underserved markets for much needed growth.

"It's going to be very difficult for a large chain to have that level of customization. Those chains get economies of scale for doing the same thing over and over," Brown said.

But specialized offerings sometimes do not equal success in so-called "food deserts" -- urban and rural areas with poor access to fresh, healthy food. At times it takes cold, hard, cash in the form of short-term public and private incentives to help offset the higher cost of running stores in those areas.

Half of Brown's 10 ShopRite supermarkets are in communities where the dominant food sellers for years have been fast-food chains, dollar stores and mom-and-pop shops that sell mostly junk food and liquor.

The 66,000-square-foot Parkside store, which received financial help from a public-private partnership, has a separate halal meat section for the area's Muslim shoppers. Sales top $40 million a year -- better than the average for Brown's stores.

"It's a great thing for the neighborhood to have something like this because so many neighborhoods don't. You're stuck eating whatever the corner store sells and that's usually not good for you," said first-time shopper Lauren Fletcher, 43.

Brown says his stores also help dispel the myth that residents of "food deserts" won't buy healthy fare.

"When I put in one of my big stores, they sell roughly the same pounds of fresh food as I sell in a suburban store," Brown said. "My sales of fresh food say it all."

TOUGH MARKETS

It is more difficult to open a supermarket in a downtrodden urban market than in a new suburb with abundant raw land.

Putting together several small properties in an established city is costly and can get mired in red tape. Renovating older buildings is pricey, but so is demolition.

Security and employee training expenses in urban stores often surpass those in suburban markets.

While rural areas may have lower costs, they may not have the shoppers needed for a grocery store to survive.

"There's not one reason why there's a food desert and there's not one solution," said researcher and consultant Mari Gallagher, who specializes in underserved markets.

First Lady Michelle Obama boosted the effort to bring affordable, healthy fare to the 23.5 million people who live in food deserts by making it part of her pledge to tackle childhood obesity.

Wal-Mart, which sells more groceries than any other U.S. retailer, and Supervalu each plans to add hundreds of discount stores in or near food deserts. Kroger <KR.N> also intends to open dozens of its Food 4 Less stores.

Detroit, one of the toughest U.S. markets for food access, is getting a Whole Foods Market <WFM.O> with help from more than $4 million in public and private incentives.

The big guys have a financial advantage over independents because they are known entities with ample cash and the ability to borrow at attractive rates. Public-private partnerships hope to give shoppers more choice by attracting a range of owners.

The U.S. government is offering about $35 million this year to spur investment in projects aimed at increasing access to healthy food.

States like Pennsylvania, New York, New Jersey, Illinois, Louisiana and California have programs that give independent operators access to grants, tax credits and affordable loans.

People's Community Market, a nonprofit, hopes California's new $200 million FreshWorks Fund will help it open a 12,000-square-foot grocery store in neglected West Oakland.

"Independent grocers are better positioned to serve communities and address the health problems," said People's Chief Executive Brahm Ahmadi, who added that his firm will partner with a sister organization to offer job training, outreach and nutrition education.

"Supermarkets are the economic engines of many communities," said Patricia Smith, senior policy advisor at The Reinvestment Fund, which administers Pennsylvania's $120 million Fresh Food Financing Initiative.

Grocery stores boost local employment, tax revenue and property values, said Smith, who added that only 8 of the 93 projects funded since the program began in 2004 have failed.

One of the closures was a Fresh Grocer store opened by supermarket operator and property developer Pat Burns, who owns several other successful Fresh Grocer stores in underserved areas around Philadelphia.

Burns also is a licensee for Supervalu's no-frills Save-A-Lot discount stores and has the company's blessing to tailor his to local tastes.

When his East Germantown Fresh Grocer didn't ring up enough sales, Burns shut it down and got to work on plans to spruce up the whole shopping center and open a new Save-A-Lot store.

"It still needed a neighborhood supermarket," he said. "It costs a lot less money to build a Save-A-Lot than it does a Fresh Grocer."

(Additional reporting by Jessica Wohl in Chicago and Jessica Hall in Philadelphia)